Thursday, July 27, 2017

The End of Easy Money?

Popular Economics Weekly

The Fed just completed its July FOMC meeting and said the sale of some of its
$4.5 trillion in securities would begin this year. CNBC has predicted the first
installment of $300B in sales could begin anytime. This is a mere drop in the
bucket and shouldn’t affect interest rates immediately.

Why? There is simply too much easy money in circulation, which is why the
10-year Treasury yield is still in the 2.3 percent range, and 30-year conforming
fixed mortgage rates are below 4 percent. Money is cheap, in other words, which
hurts savers but helps borrowers, such as homebuyers.

This is indeed helping homeowners, as June new-home sales just jumped 0.8
percent and are 11 percent higher this year. Should the Fed begin to sell
securities they bought via the various Quantitative Easing securities purchases,
it will take some of that excess money out of the economy, but should not slow
down home buying.

This is because interest rates only go up if inflation rises, and the Fed’s
preferred inflation gauge, the Personal Consumption Expenditures index, has
tapered off to 1.4 percent growth over 12 months from a five-year high of 2.1
percent. That is not a good sign for future demand and hence growth, as I’ve
been saying. But it’s good for borrowers and homebuyers.

“The month’s (new-home) sales report is consistent with our forecast, and we
should see further gains throughout the year as the labor market continues to
strengthen,” said NAHB Senior Economist Michael Neal. “While new home inventory
rose slightly in June, it remains tight as builders face lot and labor shortages
and increases in building material costs.”

The assessment of both current and future business conditions is also strong
with more describing them as good. Buying plans for homes is also a positive, up
a sharp 7 tenths to 6.7 percent with buying plans for autos also up, 1 tenth
higher to 12.7 percent.

Graph: Econoday

So the expected rise in interest rates is just not happening. Inflation is
really a gauge of present and future demand and the demand by consumers, even
for so-called capital expenditures by businesses that would expand production,
isn’t happening. Capex spending jumped slightly earlier this year, but has
slowed and manufacturing activity is still in a positive but narrow range.

However, consumer confidence continues to soar. The Conference Board’s index
is back to its highest level this year. The index rose nearly 4 points in July
to 121.1. Confidence has risen about 20 points following the November election,
hitting a 17-year peak of 124.9 in March. Is this due to the Trump election? We
haven’t yet seen higher retail sales and other indicators of greater consumer
spending that would boost GDP growth to 3 percent as Republicans have promised.

So what are consumers up to? They seem to want to save most of their earnings
at present, which is a sign that consumers are not yet convinced higher economic
growth is in the cards, in spite of the availability of so much easy money.

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Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.